ETF Focus: South Korea

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Exchange traded funds tracking South Korea have been volatile this week following the death of Kim Jong Il. The nuclear power to the north has named an untried successor, but Monday’s sharp decline in South Korean ETFs was followed by a quick rebound after country’s National Pension Service stepped in.

The iShares MSCI South Korea (NYSEArca: EWY) was down 4% on Monday and IndexIQ South Korea Small Cap ETF (NYSEArca: SKOR) was down 7%%. In contrast, EWY and SKOR were recovered 4% and 6%, respectively, on Tuesday.

Many observers are concerned that North Korea’s inexperienced successor, Kim Jong Un, the youngest of Kim Jong Il’s sons and newly dubbed four-star general, may be a wild card.

Kim Jon Un “has had little preparation in cultivating his own followers. He has no new ideology to associate with in his rise to power. I could not think of less ideal conditions — in a North Korean context — under which he could be given the reins of power,” Victor Cha, a Korea expert at the nonprofit Center for Strategic and International Studies, said in an LA Times article.

As a result of the heightened uncertainty, South Korea’s benchmark Kospi stock index fell as much as 4.9%, the most in more than five weeks, before closing down 3.4% Monday, according to BBC News. Analysts expected a power struggle to stoke volatility.

However, South Korea’s National Pension Service, the country’s largest investor, stepped into the market and piled into stocks when the Kospi dropped, report Jiyeun Lee and Saeromi Shin for Bloomberg. Kim Hee Seok, head of the fund’s investment-strategy division, believes there won’t be any more steep declines in their equities market.

“While I think the chances of serious unrest in North Korea are pretty slim, there could be small noises sporadically during the succession process, which should present bargain- hunting opportunities,” Kim said.

“South Korea has already been trading at a discount to other peers in part because of geopolitical risks,” Oh Sung Sik, chief investment officer for equities at Franklin Templeton, said. “If the market extends losses only because of Kim Jong Il’s death, that will present a buying opportunity and I would feel like adding more.”

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.